***** 1

National Health &
Security
State strategy
Pharma - 2020
Imports
substitution
Production of High-Quality
Pharmaceutical Glass Packaging
Investment Project v 2.4
February 2014
Summary of Investment Proposal
Dear Sirs,
we are bringing to your attention an opportunity to invest in equity of a project company Voronezhmedsteklo, which will be set up to organize first in Russia
and CIS full-cycle production of high-quality pharmaceutical glass packaging, i.e. production of borosilicate 1st hydrolytic class (hereafter 1 HC) tubular glass
and subsequent manufacturing of medical glass products (ampoules, vials, cartridges) out of it.
This investment project is aimed at substitution of expensive imported products, the price of which besides higher production costs includes losses due to
breakage during transportation (25%) and customs duty (15%). It is expected that Russia’s consumption of high-quality 1 HC tubular glass products will
increase several times in the next 3-5 years due to introduction of mandatory compliance with GMP standards for pharmaceutical producers starting from
2014 as well as due to strategic state program supporting domestic pharmaceutical producers “Pharma-2020”.
Estimated required project financing is 3.3 billion rubles. The project assumes installation of two furnaces to produce borosilicate tubular glass with
aggregated capacity of 17,500 tons p.a. It is planned to complete the project in 2 stages: 1st stage – construction of plant buildings and the 1st furnace with
respective equipment (capex of 2.0 billion rubles), 2nd stage – installation of the 2nd furnace with respective equipment (capex of 1.0 billion rubles), operating
costs during investment period are estimated at 0.3 billion rubles.
The project initiators intend to take 2.3 billion rubles bank loan and attract 1.0 billion rubles equity investment in order to finance both project stages.
This document shortly presents key project information. A more detailed Investment Memorandum with description of Russian medical tubular glass
market, project details and financial forecasts (including financial model in Excel) will be provided on request.
If You are interested in this opportunity, please, contact the financial advisor of the project initiators by the contacts listed below. We suggest to organize an
introduction meeting with the project initiators to present the project and discuss further questions.
Sklyarov Sergey
CEO JSCo “VRN-glass”
Tel: +7 (910) 740-66-39;
Email: [email protected]
Investment Project: Production of Tubular Glass for Pharmaceutical Purposes
2
Key Investment Considerations
Attractive market niche
(import substitution)
with high growth
potential
Strong support of the
project by the state and
regional government
Currently there are no producers of high-quality 1st hydrolytic class (1st HC) medical glass packaging with full production cycle, i.e. producing
both tubular glass and respective products out of it, in Russia and CIS
Demand for 1st HC medical glass is currently satisfied by imported products, the price of which besides higher production costs includes losses
due to breakage during transportation (25%), customs duty (15%) and logistics expenses
Demand for high-quality medical glass packaging will increase several times during the next 3-5 years due to planned mandatory adoption of
GMP standards by pharmaceutical producers starting from 2014 and due to state program of domestic pharmaceutical industry development
“Pharma - 2020”
On the federal level: this project is aimed at substitution of import, is in the framework of state strategy to develop highly technological
domestic production and is essential to fulfillment of the state program to support domestic pharmaceutical manufacturers (Pharma – 2020)
On the regional level: Government of the Voronezh region is interested in location of the future production in industrial park “Maslovskiy” and
is ready to provide a land plot for rent, free connection to electricity and gas networks as well as tax benefits. Total cost of resources provided
by government is estimated at 0.5 billion rubles.
Furnaces for production of glass will be constructed by Horn Glass Industries AG, which is a main industrial supplier of the leading global
borosilicate glass producer Schott AG. Similar level production facilities are non-existent in Russia and CIS
Unique modern
production facilities
The furnaces structure will be based on high-quality refractory blocks made of zirconium dioxide; glass melting process will be controlled
automatically by electronic systems
Location at the selected site in Voronezh region will provide access to energy resources as well as convenient logistics with major consumers
(producers of medicines packaged in ampoules and vials) and suppliers (main raw material is quartz sand)
Motivated and
experienced project
initiators
Large industry
player, high expected
profitability
Excellent exit prospects
(3-5 years horizon)
Management and development of business in the area of pharmaceutical cardboard packaging for more than 10 years, obvious synergies with
production of medical glass packaging
Established personal relationships with management of pharmaceutical producers, who are potential buyers of the medical glass packaging
(ampoules, vials)
It is expected that already in the 4th year from the project start revenue will reach 2.5 billion rubles with 64% market share in the segment of 1st
HC medical glass (in volume terms)
Expected average gross margin during 10-year forecast period is 59%, EBITDA margin – 56%, net profit margin – 36%
Potential Enterprise Value is estimated at 9 billion rubles as of end of the 4th year
Sale to PE fund: a number of Russian and foreign Private Equity funds might be interested in buy-out of a large industry player with high
profitability indicators and unique for Russia modern production facilities. Potential candidates include 3i, Apax Partners, New Enterprise
Associates, Capital International, etc.
Sale to strategic investor: leading European producers (Schott AG, Gerresheimer AG) will be interested in acquisition of a large Russian
competitor manufacturing products of comparable quality
Investment Project: Production of Tubular Glass for Pharmaceutical Purposes
3
Russian Pharmaceutical Market
Consumption of medical glass packaging is directly related to
development of the pharmaceutical market, which will be strongly
influenced by the realization of the state Strategy on development of
Russian pharmaceutical industry for the period till 2020 (Pharma2020) in the short and medium term
Russian pharmaceutical market dynamics 2004-2020F, billion rubles, in
consumer prices including VAT
1600
1500
Forecast
1332,5
1400
1185
According to Pharma-2020, the pharmaceutical market should reach
400-500 billion rubles by 2011 and in 2020 it should reach 1-1.5 trillion
rubles, i.e. more than triple
Major growth drivers for the pharmaceutical market besides Pharma2020 in the next 10 years will be the following:
1.
2.
3.
4.
Development of the additional pharmaceutical support (DLO)
program
Introduction of voluntary pharmaceutical insurance
Modernization of the hospitals’ pharmaceutical supply system
Increase of pharmaceutical consumption per capita
1200
1052,5
937,5
832,5
1000
800
707
600
400
200
270 310
350 387
427
484
552
602
187,5
137,5
0
Source: State strategy on development of the Russian pharmaceutical industry for the
period till 2020, as of October 2009
Retail sales of domestically produced medicines, in billion units (packs)
Structure of the Russian pharmaceutical market in 2009, in USD million
2,80
+8,3%
2,59
2,45
+5,4%
Hospital segment
11800; 75%
2008
Source: Pharmexpert
2009
LLO*
2010
Source: Pharmexpert
* LLO – medicines provision on benefit basis
Investment Project: Production of Tubular Glass for Pharmaceutical Purposes
4
Pharma - 2020
The purpose of the state policy, described in Strategy on development
of Russian pharmaceutical industry for the period till 2020, is to
increase the share of domestic pharmaceutical producers to 25% by
2015 and to 50% by 2020
Government approved a list of 57 strategically important medicines (to
cure oncologic and cardiovascular diseases, hepatitis B and
C, Gaucher’s disease, multiple sclerosis), production of which should
be launched on the territory of Russian Federation by 2015. 31 out of
this medicines (54%) are packaged in medical glass.
The program assumes financing in the amount of 177 620 million
rubles (in prices of February 2009) for the period of 2009-2020, part of
which will be provided by the state as well as by Russian venture
company, Rusnano, and VEB.
Among others, 36 billion rubles will be spent on support of GMP
standards adoption, which will lead to tougher requirement toward
medical glass packaging.
The Russian pharmaceutical industry will drastically toughen its
requirements to glass packaging in the nearest future. New medicines
more often require packaging out of the 1st hydrolytic class, which is
currently not produced in Russia.
Market shares of domestic and foreign producers in 2007 and as planned by
the Strategy in 2020
2007
Foreign 80%
Original
Foreign 50%
Domestic 50%
Original
Generics
Branded generics
Generics
Branded generics
Source: State strategy on development of the Russian pharmaceutical industry for the period
till 2020, as of October 2009
Structure of Pharma-2020 financing funds by use
177 620 million rubles
Thus, development of the pharmaceutical industry in the framework of
the approved state strategy will lead to:
Personnel
education
and
infrastructure
20%
1. Overall increase of the potentially available market of medical glass
packaging due to increase of domestic pharmaceutical production;
2. Significant increase of the share of 1st hydrolytic class packaging due
to enforcement of mandatory compliance of the Russian
pharmaceutical industry with GMP standards starting from 2014.
2020
Domestic 20%
R&D
60%
Adoption of
GMP
20%
Source: State strategy on development of the Russian pharmaceutical industry for the period
till 2020, as of October 2009
Investment Project: Production of Tubular Glass for Pharmaceutical Purposes
5
Market of Medical 1st and 2nd HC Glass Packaging
There is no reliable statistics on the market of medical tubular glass
and ampoules (because of the mistakes in the Federal State Statistics
Service’s data on medical tubular glass and because of the lack of
statistics data on ampoules)
Estimated Russian potential available market of 1st and 2nd hydrolytic
class in volume terms
Experts of the pharmaceutical market estimate total annual
consumption of imported and domestically produced medicines
packaged in ampoules and vials at 6 billion units with the share of
local producers about 80%
4,800 million units
This estimate in units is equivalent to 34.2 thousand tons assuming
average weight of an ampoule at 4 grams and a vial – at 14 grams
vials;
1500
Currently about 25% of the ampoules and vials market (8-9 thousand
tons) belongs to the domestic producer Tuimazysteklo. The quality of
glass produced by Tuimazysteklo correspond to 2nd hydrolytic class
and thus it is 1,5-2 less expensive compared to 1st HC glass.
Currently, the share of 1st HC medical glass accounts for 15% of the
ampoules and vials market. The market value given the current market
structure in terms of volume is estimated at 4.0 billion rubles (~$140
million)
34.2 thousand tons
ampoules;
13,2
vials; 21
ampoules;
3300
Source: expert estimates of Sagedim and RMG
Projected volume of the Russian 1st and 2nd HC medical glass marekt (in million
tons) and market share of Voronezhmedsteklo (VMS), 2011-2021
It is expected that share of 1HC glass will increase to at least 70%
after enforcement of mandatory GMP compliance in 2014, which will
result in increase of the total market value to 5.6 billion rubles (~$200
million)
36,3
34,2 35,2
37,4 39,2
11,2
It is worth noting that currently 1st HC medical glass is not produced in
Russia. The project of Voronezhmedsteklo is aimed mainly at
substitution of imported products due to offering of high quality
medical glass packaging at the price lower than import and convenient
logistics
29,1
Market share of Voronezhmedsteklo in the 4th year from the project
start is expected to be 64% of the 1st HC segment and 45% of the total
vials and ampoules market (1st and 2nd HC)
Market share of VMS
Доля рынка ВМС (1 ГК)
29,9
11,8
41,2
43,3
41,6 42,0 42,5 42,9
12,4
12,5
12,6
12,7
12,9
13,0
30,8
26,2
27,5
28,8
29,1
29,4
29,7
30,0
30,3
5,1
5,3
5,4
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
0%
0%
0%
0%
0%
0%
23%
33%
45%
64%
42%
61%
42%
60%
38%
55%
38%
54%
41%
58%
40%
58%
below 1 HC
1 HC
Source: expert estimates of Sagedim and RMG
Investment Project: Production of Tubular Glass for Pharmaceutical Purposes
6
Project Timeline
The project assumes installation of 2 furnaces to produce borosilicate
tubular glass with aggregated capacity of 17,500 tons p.a.
It is planned to maximally save on construction of buildings by using
modern fast-building technologies. Temporary roads, paved at
first, will be later reconstructed into fundamental.
It is planned to complete the project in 2 stages: 1 stage – construction
of plant buildings and the 1st furnace with respective equipment (capex
of 2.0 billion rubles), 2-nd stage – installation of the 2nd furnace with
respective equipment (capex of 1.0 billion rubles), current investment
costs are estimated at 0.3 billion rubles.
The project costs will be adjusted at least 7 times in the period of its
realization in order to decrease total costs.
According to HORN Glass Industries AG, it will take 24 months to
manufacture and install a furnace starting from the receipt of
contracted 30% advance payment
Thus, launch of production at the first furnace will take place in 24
months from start of financing, of the second furnace- in 36 months
Design
6 months
Glass production at 1st furnace
12 months
Construction of buildings
12 months
Installation of first furnace
12 months
0
6
6 months
Project start
12
6 months
Beginning of
construction
18
6 months
Installation of second furnace
12 months
24
6 months
Completion
of
construction
Glass production
at 2nd furnaces
30
6 months
Launch of 1st
furnace
36
6 months
Launch of
2nd furnace
Investment Project: Production of Tubular Glass for Pharmaceutical Purposes
7
Projected Profit and Loss Statement
Voronezhmedsteklo
Projected Profit and Loss Statement
In ‘000 rubles
Revenue
Growth,%
1 year
--
2 year
--
3 year
1 347 305
-
4 year
5 year
6 year
7 year
8 year
9 year
10 year
2 546 856
89%
2 979 822
17%
3 486 392
17%
3 346 936
(4%)
3 633 982
9%
4 113 175
13%
4 318 834
5%
COGS
(21 060)
(110 954)
(633 911)
(1 087 878)
(1 187 705)
(1 300 611)
(1 381 357)
(1 482 619)
(1 609 378)
(1 703 914)
Gross profit
Gross margin, %
(21 060)
-
(110 954)
-
713 395
53%
1 458 978
57%
1 792 117
60%
2 185 780
63%
1 965 579
59%
2 151 364
59%
2 503 797
61%
2 614 920
61%
Sales expenses
(1 925)
(3 950)
(71 828)
(132 341)
(154 490)
(180 368)
(173 940)
(188 819)
(213 277)
(224 094)
% of revenue
-
-
(5%)
(5%)
(5%)
(5%)
(5%)
(5%)
(5%)
(5%)
(79 311)
(85 229)
(90 751)
(96 827)
(102 841)
(108 668)
(114 175)
(120 067)
(6%)
(3%)
(3%)
(3%)
(3%)
(3%)
(3%)
(3%)
684 122
51%
1 419 990
56%
1 725 458
58%
2 087 167
60%
1 867 380
56%
2 032 458
56%
2 354 926
57%
2 449 340
57%
(121 867)
(178 582)
(178 582)
(178 582)
(178 582)
(178 582)
(178 582)
(178 582)
562 255
42%
1 241 408
49%
1 546 876
52%
1 908 586
55%
1 688 798
50%
1 853 876
51%
2 176 345
53%
2 270 759
53%
--
(51 343)
(49 177)
(46 031)
(44 528)
(44 804)
(43 599)
(40 586)
(156 000)
(36 000)
--
--
--
--
1 341 699
1 826 555
1 644 270
1 809 072
2 132 746
2 230 173
(268 340)
(365 311)
(328 854)
(361 814)
(426 549)
(446 035)
1 073 359
36%
1 461 244
42%
1 315 416
39%
1 447 258
40%
1 706 197
41%
1 784 138
41%
Administrative expenses
% of revenue
(10 111)
EBITDA
EBITDA margin, %
(33 096)
-
Depreciation
EBIT
EBIT margin, %
-
-(33 096)
-
Other income/expenses
--
Interest expenses
--
Profit before taxes
Income tax
Net income/loss
Net profit margin, %
(33 096)
-(33 096)
-
(25 524)
(140 428)
-(140 428)
-(120 000)
(276 000)
(276 000)
(260 428)
286 255
914 065
(40 076)
(141 283)
246 179
18%
772 782
30%
-(260 428)
-
Investment Project: Production of Tubular Glass for Pharmaceutical Purposes
8
Brief summary
1. Implementation of this project will allow to solve the
problem of supply of the Russian pharmaceutical market
glass of the first hydrolytic class due to the appearance of
Russian producers.
2. The investor of the project is JSC «International
potash company».
3. The project is supported by Ministry of industry and
trade of Russia, Ministry of health of the Republic of
Belarus , Association of Russian pharmaceutical
Manufacturers
4. Project crediting is ready to undertake the Sberbank
of Russia.
4. The plant will be picked and delivered «turn key»
under a single contract with the direct participation of
Hornglass ind. Ag as a General supplier.
5. Compliance of the quality of the glass of the first
hydrolytic class ISO 3585 type 3.3 - will be the main
result of the project.